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Keeping Up with Replacement Valuations

Construction & Real Estate, Property & Casualty

Insurance replacement values have long been an issue discussed in the insurance marketplace, but rarely pushed to the forefront … until now. It is no secret that the pandemic continues to weigh heavily on the economy, and specifically the construction industry.

Materials and labor needed to construct homes and business have increased exponentially and the supply chain has been decimated by the long standing effects of COVID-19. This rapid increase in materials has left many businesses and homeowners with undervalued replacement costs. With the rising inflation costs and unprecedented natural weather damage, the insurance market is ready to bring the issue of undervaluation to the table.

The Impacts of Undervaluation

The issues with undervaluation can be devastating within a catastrophic loss, but can also affect cases with a partial loss where co-insurance is applicable. Co-Insurance is a provision found in many property insurance policies that penalizes an insured’s loss recovery if the limit of insurance purchased is not equal to or greater than the specified percentage. Below is an example of how a co-insurance provision may apply to a property loss.

  • Building A is insured at $1,000,000
  • An 80% co-insurance provision applies
  • Building A suffers a $100,000 property loss
  • At the time of loss, it was discovered that the building was valued at $1,500,000
  • Based on the co-insurance provision, the building should have been insured at a minimum for $1,200,000, which is $200,000 shy of the requirement
  • Loss Recovery Formula:
    • ((Amount of Loss X (Limit of Insurance/Limit of Insurance Required)) – Deductible
  • The total amount recoverable from the $100,000 loss would be $83,333 minus any applicable deductible

Key Takeaways

As a property owner, you should be prepared to discuss and review your building valuations. Be sure to keep up to date on current market trends, establish regular appraisals, as well as consult with your insurance advisor on new technologies available to help improve accuracy. Businesses and insurance companies should work together to assign the right value for a given building to help avoid the unforeseen risks of undervaluation.

This article was originally published in the The Daily Reporter in July 2022.

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